When Kim and I moved last summer from our riverfront condo to this country cottage on the outskirts of Portland, one of my primary aims was to slash our spending on both housing and food.

Although we owned our condo free and clear, living there still cost us roughly $1200 per month. Plus, there were the added costs that came from living so close to bars and restaurants. Sure, we didn’t have to eat out as often as we did — we understand that was a choice — but we enjoyed exploring what the neighborhood had to offer.

Well, I’ve now had time to gather enough data to determine whether we were able to achieve this goal, to cut our monthly costs. I’m pleased to say the answer is “yes”! But for a few years, this gain is going to be completely negated by our massive home remodeling project.

Let’s look at some numbers.

Saving on Housing

To start, here’s how my monthly housing costs have changed:

During the first four months of 2017, we paid an average of $1169.91 to live in our condo. Of that, $644.65 went to our HOA and utilities. The remaining $525.27 was spent on taxes and condo insurance.

During the first four months of 2018, we paid an average of $472.55 to live on our house. Of that, $187.91 went to utilities and $284.64 went to taxes and insurance.

Before we made the move, I estimated that it’d cost us about $500 per month for housing expenses. That was a good guess. My expenses are actually a little lower than that. And because Kim is paying me $500 per month to “vest” into ownership of the house, my net monthly housing costs are actually minus $21.45. I’m making money by living here! (Haha. I wish.)

Food for Less

Meanwhile, our eating habits have also changed. We don’t go out to eat nearly as much as we used to. When we do dine out, we choose cheaper places. (Our current neighborhood isn’t quite as hip as our old neighborhood.) Last night, for instance, we hit up our favorite pub. It cost us $54, and that’s expensive for this neck of the woods. In our previous neighborhood, we’d often hit a hundred dollars when dining out.

Here’s how my food spending has changed:

During the first four months of 2017, I spent an average of $568.42 per month on groceries and $554.14 on restaurants. That’s a total of $1169.91 per month on food. Holy cats! (And that doesn’t include money that Kim paid for groceries…)

During the first four months of 2018, I spent an average of $477.33 per month on groceries and $332.01 per month on restaurants. That’s a total of $809.34 per month on food.

Let me be the first to point out that I spend a lot of money on food. I acknowledge that. This wasn’t a weak spot in my budget back when I started Get Rich Slowly in 2006, but it certainly is today!

That said, moving to the suburbs did indeed help me spend less on food. My grocery bills aren’t down as much as I’d expected — only about 16% — but that’s still saving me nearly $100 per month. Meanwhile, my restaurant spending has been cut nearly in half! Overall, my monthly food budget has declined by 28% (which is more than $300 per month).

Creating Cash Flow

When we were planning for our move last spring, I wrote that I hoped my cash flow would improve by $1200 to $1300 per month. With the reduction in housing and food spending, I’ve saved an average of $1010.58 per month so far in 2018. When you add in Kim’s monthly $500 “mortgage” payment to me, my cash flow has improved by $1510.58.

That’s outstanding!

“But wait, J.D.” you may be saying. “Have other aspects of your budget ballooned because of the move? Are you driving more, for instance? And what about your outlandish home improvement projects? You’ve already admitted that you’ve spent roughly $100,000 on renovations since moving in!”

I am spending about twice as much on fuel as I was before. During the first four months of 2017, I spent an average of $25.79 per month on fuel. So far in 2018, I’ve averaged $56.69 per month on fuel. Other than that, however, the move has had no adverse effect on my finances…except for the very expensive remodeling projects we’ve been doing.

The Big, Fat Elephant in the Room

I haven’t included the remodeling costs in the above numbers because they’re not a regular expense. Trust me: I’m perfectly aware of how much I’m spending on home improvement, and it’s caused me plenty of anxiety. But those costs aren’t recurring, so I don’t include them when calculating average monthly expenses.

What I have been doing is some mathematics gymnastics:

My cash flow has improved by $1510.58 per month.

Our pre-deck (and hot tub) home improvement costs totalled $92,934.61. Of that, $59,000 came from selling the condo, which means we’ve had $33,934.61 in un-budgeted home improvements since moving in.

We don’t have a final tally on the deck and hot tub project (and won’t for several weeks), but I expect it to be close to that $33,934.61.

Based on these numbers, we can calculate how long it will take to recover the remodeling costs (compared with having remained in the condo). Dividing our $33,934.61 excess costs by my $1510.58 per month improved cash flow, we find that it’ll take 22.5 months — just under two years — to compensate. And, of course, it’ll take roughly the same amount of time to compensate for the deck and hot tub.

Translation for non-nerds: Moving from the condo to this house saved me just over $1500 per month. This savings has been temporarily negated by all of the home projects. But after about four years — assuming we find no further problems — we’ll pass the break-even point. At that time, the move will become a financial win!

I’m generally an even-keeled guy. I don’t get worked up about much. I understand that different people have different perspectives, so I try to be respectful when others disagree with me. Having said that, there are indeed certain things that piss me off.

So how much are you supposed to be saving in order to finance 20 to 30 years post-work? The commonly accepted rule of thumb is that you’ll want about 70% of your former annual income — at least — to continue living at or near the style to which you’ve been accustomed.

Let me be blunt: This rule of thumb is asinine.

This “rule” (which is used by most retirement calculators, both on the web and from financial planners) estimates how much money you’ll need by using your income as a starting point. The 70% ratio is commonly used, but plenty of places use 80% or 90%. Regardless the percentage, estimating your retirement spending from your current income is ludicrous. It’s like trying to guess how much fuel you’ll use on a trip to grandmother’s house based on the size of your vehicle’s gas tank!

Say you make $50,000 a year but spend $60,000. In this case, your income understates your lifestyle by $10,000 a year. If you based your retirement needs on your income, you’d be screwed.

On the other hand, if you’re a money boss who saves half what she earns, you’d only spend $25,000 of a $50,000 salary. Basing your retirement needs on your income would cause you to save much more than you need. You’d be working long after the point at which you could retire safely.

Predicting how much much to save for retirement based on income makes zero sense. (Zero!) It’s one of those pervasive financial rules of thumb — such as “buy as much home as you can afford” — that does more harm than good. There’s a real danger that if you heed this advice you won’t have enough saved in retirement. If you’re proactive like many Get Rich Slowly readers are, you run the risk of saving too much, meaning you’ll miss out on using money to enjoy life when you’re younger.

Instead of estimating how much to save for retirement based on your income, it makes far more sense to plan your retirement needs around your spending. Your spending reflects your lifestyle; your income doesn’t.

So, how much do you need to save for retirement? How much will you spend? It depends.

For many people, expenses drop when they stop working. They drive less. The kids are out of the house. The mortgage is gone. And, ironically, they no longer have to save for retirement. Meanwhile, other expenses increase. (Most notably, health care costs tend to balloon as we age.)

That said, it is possible to get a general idea of how much you’ll need in the future. According to the 2016 Retirement Confidence Survey: about 38% spend more in retirement than when they’re working. 21% spend less, and 38% spend the same. Past iterations of this survey have shown that roughly two-thirds of Americans spend the same (or only slightly different amounts) during retirement as they did while working.

Translation: In general, your pre-retirement expenses are an excellent predictor of your post-retirement expenses. That’s why I prefer this rule of thumb: When estimating how much you need to save for retirement, assume you’ll spend about as much in the future as you do now.

Forget the “70% of your income” bullshit when planning for retirement. Use 100% of your current expenses instead.

Footnote
When I originally published this article at Money Boss in July 2016, financial planner Michael Kitces — who has an awesome blog — sent me a note to explain why advisors use the “70% of your income” rule. The answer? “Because it works.”

Generally speaking, the 70% of income replacement ratio works because once you subtract taxes and work-related expenses (plus savings), it’s close to 100% of expenses in most cases. I still think this is a crazy way to come at it — why not just use 100% of expenses? — and that it’s completely off-base for folks with high saving rates. For more on this subject, check out Michael’s article in defense of the 70% replacement ratio.

Do people at different levels of wealth spend their money on different things? Of course they do.

Some of these differences are by necessity, of course. If you have a million dollars in net worth, for example, then even average spending on your weekly meals will make up a much smaller portion of your net worth than the same spending would for somebody who has a net worth of $10,000.

(To put it another way: If you have two families that both spend $100 per week on food, but one family has a net worth of $1,000,000 and the other family has a net worth of $10,000, then the wealthier family spends less than one-tenth of one percent of its wealth each week on food while the poorer family spends one percent of its wealth.)

The chart divides Americans into six groups based on net worth. For each group, it shows how much of this wealth is in various assets, such as cash, housing, and cars.

Most of the info here is unsurprising. At lower levels of wealth, certain assets make up a disproportionate amount of a person’s net worth. Basic housing, for instance, is by far the most important asset for folks with less than $1,000,000 in net worth.

There are, however, a couple of things that stood out.

First, look at the value of vehicles as a percentage of net worth. For folks under $100,000 in net worth, vehicles make up almost as much wealth as housing. Holy cats! This is insane — and in a bad way. Cars are a depreciating asset. In fact, they depreciate quickly. If you’re piling much of what you own into the value of a vehicle, you’re basically throwing money away. From my experience, the wealthiest people I know drive the least-valuable cars. Coincidence or cause? You make the call.

As net worth increases, business interests make up a greater percentage of wealth. I guess this makes sense, but it’s nothing I would have ever thought about. Not all of the wealthy people I know own businesses, but a greater percentage do than the folks I know who are poor. Not sure which is the chicken and which the egg in this scenario, though. Do people who own businesses build wealth? Or do people with wealth invest in businesses? Or both?

Inspired by this, I tried to create my own bar graph in Microsoft Excel. I failed. I did, however, make a “doughnut chart” using the same color scheme as the Visual Capitalist chart.

I was surprised to see that my asset distribution — representing a net worth of roughly $1.6 million — is very similar to the asset distribution for the millionaires in the chart above.

Where there are differences (the average millionaire has more non-residence real estate than I do), it’s because of the way I’ve classified things. A huge chunk of my retirement mone is in REITs, for instance, which are like mutual funds for real estate. In other words, I do have about the same amount of money in real estate as the average millionaire but I didn’t call it out that way.

Another point of interest: My net worth contains less liquid cash than other folks at a similar level of wealth. And believe me, I feel it. It sucks. The older I get, the more I understand why it’s important to keep at least some cash readily available in bank accounts so you don’t always have to be selling mutual funds to generate working capital.

I’m not sure there’s anything actionable to be gained from this info, but it’s interesting to look at.

Think you’ve made some poor financial decisions before? Have you ever spent one million dollars in a single day? That’s what former NBA star Shaquille O’Neal did — before becoming a pro basketball player.

I go buy a $150,000 car. No negotiations. I don’t know nothing about negotiations. The guy could have told me $200,000 and I would have bought it. I go and get a black Mercedes because that’s what I always wanted: a black Mercedes and some nice wheels.

When he took the car home to show his father, his father said, “Where’s mine?” So, Shaq took his dad to the dealership and bought him a black Mercedes too. Then he bought a car for his mother. Then he bought clothes and jewelry so he could look good for the draft.

Many professional athletes stay on this wayward path which is why so many of them go bankrupt. To his credit, O’Neal came to his senses. He realized he needed to make smarter choices. He started looking for a financial advisor.

Most of the people he interviewed made extravagant promises that seemed too good to be true, so he steered clear. Instead, he hired “one little small beautiful Jewish man” who recommended a more conservative approach. O’Neal has been with him ever since: “He’s been good to me.”

It’s always nice to hear about a pro athlete who has not squandered his wealth.

I struggled with debt for years. I couldn’t get a handle on where my money went. I made a decent wage, but I was always broke! Where did I spend it all? Then I read Your Money or Your Life and heeded the book’s advice to “keep track of every cent that comes into or goes out of your life”. The results were startling.

What does it mean to keep track of every penny you earn? Your Money or Your Life recommends that you keep a Daily Money Log. This log can take any form.

The most important thing is to use the log. Every time you get money — whether it’s from a paycheck or a garage sale or picking up change from the ground — write it down. Every time you spend money — whether it’s paying bills or buying coffee or paying bus fare — write it down. Keep track of every penny that enters or leaves your life.

Tracking your spending helps to demystify money — you begin to perceive it as a tool. You gain a sense of power — you no longer feel that money controls you, but that you control money. Your awareness of your money habits is sharpened, allowing you to make changes to improve your situation. This is an essential money skill, and it’s easy. Try this for two weeks and you’ll find that it becomes second nature.

When you track your spending, it’s important not to make judgments. This activity is meant to describe your money habits, not to change them. (You do want to change them, of course, but that’s a separate task.)

Here are some things I’ve learned over the past few years of tracking my own spending:

Be careful with transactions that are easy to forget. Some transactions — cash transactions, online transactions, transactions without a receipt — are quickly forgotten. Take special steps to remember these, such as…

Get a receipt for everything. It’s easy to forget were you spent your money on just 24 hours later. Make a habit of putting all your receipts in one place so that you know where to find them.

It’s best to process your transactions daily. I find this hard to do. I process my transactions weekly. If I go longer than this, something invariably gums up the works: I can’t remember a transaction, can’t find a receipt, etc.

Make it a routine. If you get in the habit of tracking your spending, it becomes second nature.

As always, do what works for you. No one system is perfect for everybody. The important thing is to track your spending. How you do this is up to you.

Here’s what works for me:

I try to get a receipt for every transaction. If one is unavailable, I jot a note to myself as soon as I can.

At least once a week, I take my wad of receipts and enter the transactions into Quicken.

This process paints a picture of your spending habits as they actually exist, not as you think they exist. You can use this information to create a budget. Or, at the very least, to serve as snapshot of where your money goes. Without this method, it’s difficult to know exactly how much you really spend on thneeds or zizzer-zoof seeds.

My name is J.D. Roth. I started Get Rich Slowly in 2006 to document my personal journey as I dug out of debt. Then I shared while I learned to save and invest. Twelve years later, I've managed to reach early retirement! I'm here to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you get rich slowly. Read more.

If you like this website, you should check out the year-long Get Rich Slowly course. It contains everything I've learned about saving and investing during 12 years of writing about money. Buy it here.

General Disclaimer: Get Rich Slowly is an independent website managed by J.D. Roth, who is not a trained financial expert. His knowledge comes from the school of hard knocks. He does his best to provide accurate, useful info, but makes no guarantee that all readers will achieve the same level of success. If you have questions, consult a trained professional.

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